Thursday, September 24, 2015

Sitting tight and liquid, and praying

"Youth is easily deceived because it is quick to hope."
—Aristotle (Greek, 384-322BC)
Word for the day
Penitent (adj)
Feeling or expressing sorrow for sin or wrongdoing and disposed to atonement and amendment; repentant; contrite
(Source: Dictionary.com)
Malice towards none
Well done Mr. Fadnavis!
Now please also tell us whatever the previous government did to suppress the freedom of expression and appease religious minorities was right and you see nothing wrong in continuing with those practices.

Sitting tight and liquid, and praying

Past few months have been tough on both investors and investment experts. The rise in uncertainty and consequent rise in volatility in asset prices and returns has made the task of asset allocation tougher. Traders appear even more exasperated.
Under the circumstances you cannot find fault with me, if I pray, totally with selfish motive and all my sincerity — "May RBI governor please (a) not effect any change in the monetary policy stance and key rates; and (b) make a strong commentary on the inadequacy of government's efforts in reviving economic growth and preparing for a potential 2008-09 like global contagion."
This coming on the back of a spate of growth downgrades and global risk-off trade, may lead to material correction in Indian equity and bond prices. The assets which are quoting at "middle of the channel prices" may correct sharply to the lower bound of the channel and provide an entry point where I do not have jostle with too many other buyers.
I firmly believe that:
(a)   We have already entered the phase of low inflation and lower growth. With most extant drivers of growth (US, EU, China, Commodity producers) throttled by sluggish demand and excessive debt, it is highly unlikely that we may see any meaningful recovery in wages and industrial commodities, energy & food prices for next few years.
This phase may last at least for next 3years. The interest rates in India are definitely not rising from the current levels in this period. They may in fact be cut materially once the liquidity conditions improve.
Given the relatively strong macro fundamentals, the government of India securities (Gilts) therefore would make an attractive low risk investment.
My simple calculation suggests if I can get an entry when benchmark 10yr trades at 7.9% yield, I may be able to get ~9% CAGR for next 3yrs, assuming the benchmark yields correct by 65-70bps over this period.
Not at all bad when the nominal growth is expected to be close to 10%.
(b)   The convergence of equity yields and bond yields has historically led to beginning of most bull markets in Indian equities.
A sharp correction in equity prices, alongside bond price correction courtesy Governor Rajan and Chairperson Yellen will also provide a hassle free entry point in Indian equities.
As indicated this Monday (see here) the market internals are weakening with each passing day. In past two days, the cracks in Nifty have widened further.
I do not know what would be the immediate trigger, but ~7K on Nifty appears quite plausible from here.
In the meanwhile, I am sitting tight and liquid.

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